Pittsburgh?€™s White Elephant Is Protectionism

At the Group of 20 summit in Pittsburgh this week, leaders will spend a great deal of time discussing minor questions that barely touch on the urgent problems facing the world’s leading economic powers. This is partly because many countries — and primarily their political elites — have concluded that the global crisis is ending, and partly because the most important questions are always the most difficult to address.

The general mood is definitely much better now than it was last fall. This is not only because “green shoots” of new growth have appeared in the U.S. and European economies, but also because part of the problem is resolving itself: U.S. homeowners have started saving more and the Chinese government is working to raise domestic demand for its goods. This is serving to correct one of the global imbalances that led to the crisis. However, some problems have temporarily been set aside for the future. Because of their habit of using fiscal incentives to boost their economies, the governments of developed countries will inevitably be forced to raise interest rates to balance their budgets. The Chinese government has its own problems, lacking good examples of large-scale and long-term infrastructure projects when no developed system of political accountability is in place. Down the road, governments will have to cut back on social spending and cope with an inevitable increase in painful bankruptcies.

But at Pittsburgh, G20 leaders will be discussing the more trivial questions of limiting bonuses to bankers (an insoluble problem in state banks, and no problem at all in private banks), new requirements for bank reserves (the United States is unlikely to listen to the opinions of other countries on this issue), and the role of the International Monetary Fund and World Bank (developing countries cannot seem to grasp that having a “big role” in those organizations would also give them a “big responsibility”).

What G20 leaders should be discussing is the growth of protectionism. Protectionist measures always make front-page headlines, as we saw earlier this month when the U.S. president raised import tariffs on Chinese tires and Beijing immediately retaliated with countermeasures. A report just released by the Center for Economic Policy Research shows that the G20 member countries — all of which pledged to combat protectionism — introduced 121 measures favoring domestic companies while discriminating against imported goods. Those measures have affected 95 percent of all traded commodities and 80 percent of the world’s economic sectors.

Unfortunately, Russia is one of the world’s leaders in the ruinous race to erect protectionist barriers, with 20 already in place, according to CEPR. In addition to Russia, a host of other countries — China, India, Indonesia, Britain, the United States, Germany, France and Poland — have introduced restrictions that worsened trade conditions for more than 100 of their trading partners. There is no comfort in knowing that Russia shares its dubious distinction with the world’s leading economies. As a rule, protectionist measures are self-destructive for a domestic economy, although the damage caused by “trade wars” is obviously much greater. The fact that these issues are so unpleasant to discuss is all the more reason leaders should resolve to address them.

Konstantin Sonin, a visiting professor at the Kellogg School of Management, Northwestern University, is a columnist for Vedomosti.